Can I Get an SBA Loan with Bad Credit?:Credit is Rarely the Deciding Factor

Business owners and aspiring entrepreneurs alike feel that having bad credit or prior delinquencies means a "dead end" for them when it comes to financing options. Bad credit can take the form of a sub-680 FICO score or past derogatory events like late payments, collections, bankruptcies, or felonies. However the fact of the matter is that while credit scores and these other metrics do matter, they are just one class of input in a wider multi-faceted and nuanced underwriting process. Individual SBA lenders look at a mosaic of factors and bad credit is seldom the make-or-break factor in their ultimate decisioning.

At the very core of it, SBA lenders are looking for borrowers with decent liquidity and net worth relative to their requested loan size who are either currently operating a business with demonstrable cash flow or starting one that can quickly ramp to becoming a cash flow generating operation. Existing business owners seeking expansion financing need to demonstrate that within a given period, their business's cash flow profile (EBITDA is often used as a proxy for this) is at least 1.15-1.25x the total debt service implied by the loan they would take on (interest payments plus debt repayment).

Let's assume for example that you are seeking a $1M SBA loan to expand your pest control business. Most SBA 7(a) loans have a 10-year term and the interest rate is the floating Wall Street Journal (WSJ) Prime Rate plus 2-3%. So let's call it 10% for our purposes.

Using the standard amortization formula:

Where:
P = $1,000,000 loan principal
r = 10% interest rate
n = 10 years

We calculate that the annual debt service will be ~$163k per year (this is inclusive of both interest and principal repayment). Thus our pest control company needs to be generating at least $187k to $204k of EBITDA annually (1.15-1.25x the debt service amount) in order to support the loan request.

Of course if you are seeking a startup loan, you have no current EBITDA to go off of. Thus for new business owners, lenders are willing to underwrite to projections modeling the path of the business from inception to cash flow positivity over the next 12-24 months but personal liquidity and net worth will be even more important to give the lender comfort that in a downside scenario you possess the financial wherewithal to service the loan. A large component of startup loan underwriting also hinges on the credibility and strength of the business model or brand (the latter is especially emblematic for franchise systems). Lenders will assess to see if the brand has maintained low SBA default rates amongst existing and prior franchisees and if 3-year continuity rates are up to par (a good sign is if +90% of franchisees that started 3 years ago are still in the system today).

All that being said, active delinquencies, unresolved tax liens, recent bankruptcies without sufficient seasoning, or a pattern of missed payments across multiple accounts will usually cause lenders to step back regardless of business performance or brand strength. But we need to stress that borrowers with older credit events, isolated issues with reasonable explanations, or scores depressed by utilization rather than defaults can often offset credit risk with strong cash flow, liquidity, equity injection, collateral/liquidity profile, or highly-relevant experience.

Platforms like Franchable exist to provide a disciplined look at how a deal actually screens to SBA lenders and align a borrower's profile with the lenders that best understand and can assess your unique risk profile. This comprehensive process includes building lender-grade cash flow projections, assessing brand-level performance across franchise systems, and understanding how different banks interpret risk within specific concepts and industries. By aligning borrower profiles and business dynamics with lenders that genuinely understand those risks, borrowers can better ascertain whether a deal is financeable today.